Archive for the "Trading" Category

The modern currency trading technologies enable the taking of big profits in a short period of time: brokers provide their clients with leverages; client terminals support the function of automatic trading etc. Indeed, with Forex it is possible to become rich in a moment but it is also possible to lose everything at once.

Let us discuss the main market and non-market risks.

Exchange rates volatility

One of the main properties of Forex is its volatility that reflects the dynamics of prices. The market is considered as volatile if there are frequent and significant price fluctuations. Price spikes can lead to financial losses. While opening a deal a trader should consider that prices are subject to various fluctuations. Therefore, it is necessary to control the opened positions or to place limit orders.

Dynamics of prices is affected by various economic and political events as well. The release of breaking news can provoke significant price changes. Moreover, from time to time the central banks carry out the currency interventions in order to influence the exchange rate of the national currencies. Interest rates also play an important role as they can lead to the changes in exchange rates.

The risk of using a leverage

Leverage serves as a comfortable and effective trading tool. The profitability of deals can be significantly multiplied if you use the assets borrowed from a broker. The higher the profit is, the greater the risks are. The losses cannot exceed the equity of a trader, but if a trader uses a big leverage, then even the slightest price movement in the opposite direction can reduce the deposit to zero.

Technical risks

In order to control deals and to find a right moment for making a buy or a sell deal, a trader needs a computer and a constant access to the Internet. There is always a possibility of unexpected power cutoff, equipment errors or disconnection. As a rule such alternative devices as smartphones, laptops and tablet computers can be a good solution.

Dishonest brokers

Unfortunately, while trading on Forex there is a risk to choose an unreliable broker. But it is quite easy to find a reliable company as there are lots of comments in the Internet. While opening an account you should learn the information concerning the organization, check out the presence of all necessary licenses, read attentively the trading conditions. These measures are essential for security.

Prestigious brokers are not really interested in losses of their clients. That is the reason why they try to ensure the maximum transparency of their activity and propose the effective trading instruments. Reliable companies neither deliberately change the exchange rates nor play against the client! Moreover, you can detect such “bucket shops”, you just need to be cautious.

Trading psychology

Available trading and high speed of deals execution can seem easy and simple. If you consider the trading as an exciting game, you can pay for this with your own money. A trader’s decision is influenced by various psychological factors. Therefore, it is necessary to learn how to control your emotions.

Summary: trading on Forex is one of the most risky ways of investment to compare with a banking deposit, for example. But most of the risks can be prevented if you remember that they are present.

Charles Dow is often considered as the founder of the technical analysis. Jointly with his companion he implemented the famous Dow Jones industrial average, created one of the leading world financial information agencies and began the publishing of the comprehensive financial data. Moreover, he wrote several articles concerning the financial market.

The suggestions described in these publications were later summarized. Today they are known as Dow theory. This theory became fundamental for the modern technical analysis. Though Dow described the processes occurring at the securities market, his theory is applicable to the other financial markets.

Charles Dow paid a lot of attention to the well-known principles as directed character of the price changes, cyclical character of the market processes, the interrelation between the trading volume and exchange rates etc. The theory is based on 6 tenets

1. The market has three types of movements

Dow confirms that trends can be subdivided into primary (long-term) trends, secondary (intermediate) trends and minor (short-term) trends. Each type of trend is in turn an upward or downward. The upward trend means that each high and low is higher than the previous one. In the downward trend each high and low is located lower than the previous one.

The primary trend may last from less than a year to several years. The secondary trend serves as a correction and usually lasts for over 3 months. The minor trend is defined as lasting for less than three weeks reflecting the short-term market fluctuations.

2. Market trend has three phases

Phases of the long-term trend are: an accumulation phase, a public participation phase, and a distribution phase.

During the first phase provident investors with significant capital make trade operations that appear to be against the general opinion of the market. The second phase begins when active and technically oriented traders take part. These traders are intended to follow the market trends. The phase is accompanied by the strengthening of the trend and price changes. Then begins the third phase: the public is fully involved in the market resulting in agiotage. Thanks to the experienced investors begins the new accumulation phase.

3. The stock market averages must confirm each other

According to Dow, the industrial and transportation averages must confirm the current trend and provide signals of its reversal with slight divergence in time.

4. The market discounts everything

Everyone knows the expression “the price accounts everything”. Charles Dow supposed that the market responds very quickly to any information. Any factor that can affect the demand or supply is immediately reflected in dynamics of price and averages.

5. Trends are confirmed by volume

The increase of the trading volume takes place when the prices are moving within the main trend. Otherwise the price changes do not reflect the real market opinion.

6. Trends exist until definitive signals prove that they have ended

A trend will be changed in any case, but if the signals of price changes are not clear, this fact can be considered as a signal of temporary corrective movement, but not as a sign of a trend reversal.

Thus, it is evident that some part of these assumptions is applicable to the Forex market. The ideas of Charles Dow are relevant even now despite more than 100-years history and the fact that the modern analytical tools emerged.

The history of the index began in the XIX century. It was implemented in 1896. At that time there were only few instruments for analysis and description of the processes that took place at the stock market. Therefore, a question concerning the elaboration of these instruments became more and more urgent. The evaluation method of market trends proposed by Dow and Jones became the real innovation and significantly simplified the life of most businessmen. Firstly, index took into account 11 large US companies (9 of them were railroad companies). It was calculated as simple average of their stocks value. Despite the fact that more than 100 years have passed and accounting method has undergone significant changes, the Dow Jones index remains an important benchmark for global investors even now. Today it includes over 30 leading American companies.

Edward Jones

Charles Dow (1851 –1902) and Edward Jones (1856–1920) were friends and companions. Both of them were gifted as journalists and businessmen. Together they worked in the sphere of financial news. In 1882 Dow and Jones started their own business in New York. Their office was located in the basement of the confectioner’s shop where they began publishing the small financial news bulletin under the title Customer’s Afternoon Letter. This bulletin became popular very soon; the number of printed copies was increasing; investors appreciated the benefits of the given information, though at that time this information could be defined as insider.

In 1889 the partners published the comprehensive edition of The Wall Street Journal created for financial and commercial circles. It was focused on providing the breaking and reliable news. The Wall Street Journal is that very edition which has been publishing the Dow Jones index since 1896. The edition is still considered as confident and today the number of printed copies exceeds 2 million. For a long time the newspaper did not have a real counterpart. The contemporary counterpart of the WSJ is famous Financial Times of London.

In fact, there are some other Dow Jones indices (transportation index, utility index, composite index, etc.) that characterize the different economic fields. But only the industrial index is considered as the most popular serving as a barometer of the stock market. This index is fundamental for institutional and private investors. And this is quite reasonable, as the 100-year practice confirmed that this function is accomplished properly. The index comprises the mature and reliable companies with 1/5 of the market value of all American stocks.

Dow Jones index was appreciated not only as an impartial indicator of the US stock exchange market, but also as one of the country’s economy in general.

To continue the topic of previous article, we will consider some aspects of wave analysis.

If we look at the chart of currency price changes we will see that there are several types of movement. The chart depicts the phases of descending and ascending movement as well as those of sideways movement. According to the Elliott wave theory, each market stage is a wave, which in turn is a model of crowd’s behavior. As it was mentioned before, a wave can perform the function of action or reaction. The first one moves the market within the general trend, while the second one makes it reverse.

According to the style, waves are subdivided into motive and corrective. Each market cycle is composed of motive and corrective waves. All waves of reverse movement develop in corrective style. Elliott discovered that the motive waves have 5-wave structure, while the corrective waves have 3-wave structure. Therefore, the whole cycle consists of 8 waves. Each wave can be divided into several smaller waves.

The waves can be indentified for every timeframe with the help of more than 10 wave levels. Each of them has its own name and marking. The symbols below were implemented to simplify this procedure:

Triad of symbols for higher wave levels

[1][2][3][4][5][A][B][C][D][E][W][X][Y][Z]

(1)(2)(3)(4)(5)(A)(B)(C)(D)(E)(W)(X)(Y)(Z)

1, 2, 3, 4, 5, A, B, C, D, E, W, X, Y, Z

Triad of symbols for lower wave levels

[i][ii][iii][iv][v][a][b][c][d][e][w][x][y][z]

(i)(ii)(iii)(iv)(v)(a)(b)(c)(d)(e)(w)(x)(y)(z)

i, ii, iii, iv, v, a, b, c, d, e, w, x, y, z

The following rules are used for interpretation of waves:

The turn of the second wave is never equal to 100% upward move of the first wave. For example, at bullish market the second wave low will never be below the beginning of the first wave.

The third wave in impulse sequence is never the shortest. As a rule it is the longest.

The fourth wave never ends in the price range of the first wave, except it forms the chart in a special way: the market movement is the same as it was before, irrespective of its size and movement period.

Analysts often use Elliott wave principles in combination with Fibonacci numbers to calculate the period and size of market movement.

Ralf Nelson Elliott is an American accountant. He was born in 1871. From the age of 20 he worked in executive positions for railroad companies in Mexico. Later he entered the accounting field and was known as a qualified economist. Elliott took part in international government projects, was appreciated as auditor and consultant. He published several books on business organization, economic and social issues. In 1927 Elliott started successful consulting business.

Unfortunately, by 1929 malignant anemia had left him bedridden. Nevertheless, Elliot remained a man of action and creativity and therefore continued his work despite the serious illness. His studies were focused on stock market. Elliot was influenced by works of Charles Dow and Robert Rhea. Having investigated the equity market, he discovered new unknown patterns of price movement. After the thorough analysis which took him several years, Elliott presented his conclusions to the financial world. When Elliot’s discoveries proved to be practically useful, his articles were published in popular magazines and newsletters. Elliot himself became an analyst whose opinion was considered by biggest investors.

In 1938 appeared the book “The Wave Principle” where he detailed the results of his studies and described his method. His next book entitled “Nature`s Law – The Secret of the Universe” was published in 1946.

We can say that Elliot continued the Dow’s theory of cycles, waves and ripples on ascending and descending market trends. He emphasized the fact that the activity of great mass of people results in price changes regulated by specific laws that can be traced in different fields. Elliot compares them to nature’s laws and gives the examples of the similar patterns in flora and fauna. He stated that crowd behavior has several psychological stages, whether this is a slave rebellion or stock exchange trading. The development of both can be traced on different timeframes (from minutes to centuries). The author describes the peculiarities and signs of changeability for different phases and in what way it is possible to take an advantage of it.

According to the wave principle each market event can be considered as an effect and cause of important information. This interconnection can be explained by social nature of humans. Therefore, this process generates the repeating figures.

According to Elliot, waves are the models of directed motion. Each wave has one of two possible functions: action or reaction. Particularly, each wave can stimulate the development of the upper wave or interrupt it. The relative direction of a wave defines its function. As a rule, waves are interchanged according to their length: long-short etc. Each wave can be divided into several short waves. Therefore waves are fractal, i.e. on the same part of the chart we can observe waves of different scale, depending on the timeframe.

We can come to a conclusion that Ralf Nelson Elliot was some sort of romantic scientist, partly philosopher, partly naturalist. His theories are still used by traders, though some of them accuse Elliott in cheating.

Classical wave analysis is quite complicated but the examination of its underlying concepts can be useful to forecast price movements and levels.